Enforcing Contracts

We have English speaking guangzhou lawyer, Dongguan lawyer, Foshan lawyer, Shantou lawyer, Nanhai lawyer, Zhongshan lawyer, Huizhou lawyer, Zhuhai lawyer, Jiangmen lawyer, Qingyuan lawyer, Zhaoqing lawyer to answer questions from clients. Here is a few questions we received and answered.

(1) Do contracts need a seal?

The law itself says a signature or a seal is effective so an official seal itself isn't needed if both parties sign (Art 32). That's the theory. In practice it is Chinese custom to use a seal and it is especially important to have a company or institution use a seal to help avoid later questions concerning whether the person who signed the contract actually had the authority or not to contract and bind the company or institution.

(2) Do you need to sign a contract to have a contract?

Even if a contract hasn't been signed a court will hold a contract exists if one party fulfills his principal obligations and the other party accepts it (Art 36). This could be useful because the contents of e-mails are valid (Art 11) when deciding the contents of a contract. Keep your e-mails when negotiating. They may well come in useful.

(3) What can I do if parts of the contract I have signed are ambiguous?

A useful article when arguing about the meaning of terms/articles in a contract are the provisions concerning standard terms.

These are defined as

(Art 39) "Standard terms are clauses that are prepared in advance for general and repeated use by one party, and which are not negotiated with the other party when the contract is concluded"

Such standard terms are invalid if they increase the liability of the other party, deprive the other party of a material right or exempts the supplying party from liabilities. (Art 40).

If standard terms are just ambiguous and two interpretations are possible then the interpretation unfavourable to the party supplying the standard clause/term shall apply (Art 41).

In addition if standard terms are inconsistent with non standard terms then the non standard terms will apply (Art 41).

(4) What is the significance of a clause that specifies damages for breach of contract?

Contracts sometimes outline damages to be paid in the event of a breach of contract - either party has the right to go to court to try to get such a sum increased or decreased in the event of a dispute (Art 114).

The article itself is

Art 114 "The parties may prescribe that if one party breaches the contract, it will pay a certain sum of liquidated damages to the other party in light of the degree of breach, or prescribe a method for calculation of damages for the loss resulting from a party's breach. Where the amount of liquidated damages prescribed is below the loss resulting from the breach, a party may petition the People's Court or an arbitration institution to increase the amount; where the amount of liquidated damages prescribed exceeds the loss resulting from the breach, a party may petition the People's Court or an arbitration institution to decrease the amount as appropriate"

(5) If a contract is in both English & Chinese which is valid?

According to the Contract Law both are valid.

Art 125 "Where a contract was executed in two or more languages and it provides that all versions are equally authentic, the words and sentences in each version are construed to have the same meaning. In case of any discrepancy in the words or sentences used in the different language versions, they shall be interpreted in light of the purpose of the contract."

This article does make it clear that both languages are valid (although in other regards, when viewed from a legal perspective it is less than helpful or clear).

(6) What is the significance if a contract says any dispute will go to an arbitration commission?

Sometimes contracts state that a Chinese or Foreign arbitration body will resolve disputes and that this will be the final arbiter. This means that the decision of the arbitration body is final and binding. You are denied the right to go to court in the case of a dispute (which in China may not always be a bad thing depending on whom the arbitration commission is). You can however subsequently go to court to get the arbitration commission's findings enforced.

It should be noted that this isn't true in respect of disputes involving employment - no matter what the employment contract itself says, both parties have a right to first go to arbitration and then to court.

The article itself is

Article 128 "The parties may resolve a contractual dispute through settlement or mediation. Where the parties do not wish to, or are unable to, resolve such dispute through settlement or mediation, the dispute may be submitted to the relevant arbitration institution for arbitration in accordance with the arbitration agreement between the parties. Parties to a foreign related contract may apply to a Chinese arbitration institution or another arbitration institution for arbitration. Where the parties did not conclude an arbitration agreement, or the arbitration agreement is invalid, either party may bring a suit to the People's Court. The parties shall perform any judgment, arbitral award or mediation agreement which has taken legal effect; if a party refuses to perform, the other party may apply to the People's Court for enforcement."


An analysis of Chinese Contract Law contrasted with Western Contract Law


Contract Law of the People's Republic of China Order [1999] No.15 of the President of the PRC

(1) Judicial Interpretation of Chinese Contract Law

"Article 61 Where, after the contract becomes effective, there is no agreement in the contract between the parties on such contents as quality, price or remuneration, or place of performance etc., or such agreement is ambiguous, the parties may agree upon supplementary terms through consultation; if a supplementary agreement cannot be reached, such terms shall be determined in accordance with the relevant provisions of the contract or the transaction practices."

"Article 62 Where certain contents agreed upon by the parties in the contract are ambiguous and cannot be determined in accordance with the provisions in Article 61 of this Law, the following provisions shall be applied:
(1) if quality requirement is not clear, performance shall be in accordance with the state standard or industry standard; absent any state or industry standard, performance shall be in accordance with the customary standard or any particular standard consistent with the purpose of the contract;
(5) if the method of performance is not clear, performance shall be rendered in a manner which is conducive to realizing the purpose of the contract;"

Western Law tends to have a rich common law of precedents to help and constrain judges when interpreting statutes whereas the Chinese Law system is more deficient in this aspect.

"...terms shall be determined in accordance with... transaction practices."
"...performance shall be in accordance with the customary standard..."
"...performance shall be rendered in a manner which is conducive to realizing the purpose of the contract;"

The 1999 contract law does not provide actual guidelines to help Chinese judges to come to consistent decisions.

(2) Offer & Acceptance

(i)

"Article 19 An offer may not be revoked, if
(1) the offeror indicates a fixed time for acceptance or otherwise explicitly states that the offer is irrevocable; or
(2) the offeree has reasons to rely on the offer as being irrevocable and has made preparation for performing the contact."

Art 19(2) could be said to be a poorly thought out piece of drafting.

"the offeree has reasons to rely on the offer as being irrevocable..."

This appears to require a subjective rather than on objective enquiry. It requires a subjective test of whether the offeree had reasons to believe rather than an objective test of did the offeree have reasonable grounds to believe.

"... and has made preparation for performing the contact."

This provides for no level of preparation. It only requires the offeree to make preparations rather than make substantial preparations.

(ii)

"Article 31 If the acceptance does not substantially modifies the contents of the offer, it shall be effective, and the contents of the contract shall be subject to those of the acceptance, except as rejected promptly by the offeror or indicated in the offer that an acceptance may not modify the offer at all."

"If the acceptance does not substantially modifies the contents of the offer, it shall be effective,..."

American Law requires a mirror image acceptance. The acceptance must exactly mirror the offer. Any change makes it a counter-offer.

This is a rule that can cause problems in the case of what is called "the battle of the forms", in other words, when one business, for example, sends an order on its own form with its own standard terms and the other business replies with its own invoice which has its own standard terms which do not match the other business's terms.

(3) Invalid contracts

Western law would use the common law differentiation of "void" and "voidable". Art 54 would use the term voidable.

"Article 52 A contract shall be null and void under any of the following circumstances: (1) a contract is concluded through the use of fraud or coercion by one party to damage the interests of the State; (2) malicious collusion is conducted to damage the interests of the State, a collective or a third party; (3) an illegitimate purpose is concealed under the guise of legitimate acts; (4) damaging the public interests; (5) violating the compulsory provisions of laws and administrative regulations."

"Article 53 The following exception clauses in a contract shall be null and void: (1) those that cause personal injury to the other party; (2) those that cause property damages to the other party as result of deliberate intent or gross negligence.'

"Article 54 A party shall have the right to request the people's court or an arbitration institution to modify or revoke the following contracts: (1) those concluded as a result of significant misconception; (2) those that are obviously unfair at the time when concluding the contract. If a contract is concluded by one party against the other party's true intentions through the use of fraud, coercion, or exploitation of the other party's unfavorable position, the injured party shall have the right to request the people's court or an arbitration institution to modify or revoke it. Where a party requests for modification, the people's court or the arbitration institution may not revoke the contract."

(4) Duty to disclose

"Article 54 A party shall have the right to request the people's court or an arbitration institution to modify or revoke the following contracts: (1) those concluded as a result of significant misconception..."

In English law there is no general duty to disclose: Silence does not constitute a misrepresentation. "Caveat Emptor" - let the buyer beware is a common principle in English derived legal systems.

exceptions:

- partial non-disclosure

- change of circumstances, see With v O'Flanagan [1936] Ch 575

With v O'Flanagan [1936] Ch 575

During the course of negotiations for the sale of a medical practice, the vendor made representations to the purchaser that it was worth ?000 a year. By the time when the contract was signed, they were untrue. The value of the practice had declined in the meantime (to ?50) because of the vendor's inability to attend to it through illness. Lord Wright MR quoted:

"So again, if a statement has been made which is true at the time, but which during the course of negotiations becomes untrue, then the person who knows that it has become untrue is under an obligation to disclose to the other the change of circumstances." Therefore, the failure of the vendor to disclose the state of affairs to the purchaser amounted to a misrepresentation."

- fiduciary or confidential relationships

- contracts uberrimae fidei (contracts of the utmost good faith), e.g. contracts of insurance

(5) Government Involvement in Contracts

"Article 127 Within the scope of their respective duties, the administrative department of industry and commerce and other relevant departments shall, in accordance with the relevant laws and administrative regulations, be responsible for monitoring and dealing with any illegal acts which, by taking advantage of contracts, harm the interests of the State or the interests of the public and society; where such an act constitutes a crime, criminal liability shall be investigated in accordance with the law."

The government body that charges wrongdoing could be the same body that entered into a contract with the "wrongdoer". The wrongdoer would be denied a neutral hearing because he can't go outside the agency investigating him. This would be a very unusual circumstance in Western law. At the very least a court would have the power to review the ministries decision.

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